Bloomberg News

Fiscal Cliff Road Paved by Those Who Took U.S. to Brink

June 18, 2012

Fiscal Cliff Road Paved by Those Who Took U.S. to Brink

The Occupy movement protests on the west lawn of the U.S. Capitol. Photographer: Jahi Chikwendiu/The Washington Post via Getty Images

The people responsible for averting the end-of-year fiscal cliff are the same ones who almost caused a U.S. debt default, let airline ticket taxes lapse for two weeks and came within two hours of shutting down the government.

The 112th Congress, paralyzed by ideological divides and deadlocked on routine issues, may approach the brink again. Lawmakers are nowhere near an agreement on what to do about $607 billion of tax increases and spending cuts slated to kick in at the beginning of 2013.

“If people wanted to resolve these problems, we’d have them resolved,” said Representative Henry Waxman, a California Democrat first elected in 1974. “People used to work out compromises for the good of the country.”

Instead, Waxman and lawmakers in both parties said they don’t expect much from Congress until after the Nov. 6 election. That delay will force a compressed legislative session with the economy and the role of government in the balance.

If Congress does nothing the economy will probably fall into a recession in early 2013, according to the Congressional Budget Office, because of what Federal Reserve Chairman Ben S. Bernanke has called a fiscal cliff.

The unusually tall stack of urgent tax-and-spending issues creates the potential for a grand bargain on fiscal policy, a partisan standoff or a typical congressional deal that staves off an immediate crisis by setting up another one in the future. Economists surveyed by Bloomberg News last month said they expect lawmakers to offset much of the fiscal drag, allowing the expansion to continue into 2013.

‘Extremely Difficult’

“I guess it would be nice to think that somehow more enlightened leadership and followership could avoid a dismal conclusion, but so far there’s not much evidence of it,” said Pete Davis, president of Davis Capital Investment Ideas, who advises Wall Street money managers on government policy. “Even doing the obvious stuff that almost everybody supports is extremely difficult.”

For now, members of Congress are talking a lot about the need to act -- and not acting much. The Republican-led House passed a bill to avert spending cuts and will pass another in July to extend expiring tax cuts. Neither measure will advance in the Senate, and President Barack Obama opposes both.

‘Big Impact’

“Anybody that tells you that they know what’s going to happen or what will happen after the election is a lot smarter than I am,” said Senator Roy Blunt of Missouri, who is Republican presidential candidate Mitt Romney’s liaison to Senate Republicans. “If we’re going to see changes in January that are significant, I think that’ll really have a big impact on whether things get done.”

The difficulty of advancing fiscal legislation before the election will create what Blunt called a “very compressed” timeline for action afterward as lawmakers calculate whether they would gain advantage by waiting until January.

House members are scheduled to return to Washington Nov. 13 for four days of work and organizing for the new Congress that starts in January. The members who can vote in the so-called lame-duck session were elected in 2010, including those who are retiring or were defeated in the election.

They’ll go home for Thanksgiving, returning Nov. 27 for work that’s scheduled to last through Dec. 14 but could go right up to Christmas or Dec. 31, given the deadlines and the scope of the issues in play.

‘Looney Tunes’

“It’s a huge dive into a small pail of water, straight out of the Looney Tunes cartoons,” said Jim Nussle, a former Republican chairman of the House Budget Committee who left Congress at the end of 2006. “It’s nearly impossible.”

The largest single item with a Dec. 31 deadline is expiration of the income tax cuts, which were first enacted in 2001 and 2003 and extended in 2010. Unless Congress acts, tax rates for wages, capital gains, dividends and estates will increase. The alternative minimum tax, a parallel system originally designed to ensure the wealthy paid some tax, would hit 21 million households instead of the 4.3 million affected during 2011, according to the Tax Policy Center, a nonpartisan research group in Washington.

During fiscal years 2012 and 2013, those tax changes would cost taxpayers $221 billion, making up more than one-third of the $607 billion gross total of fiscal tightening, according to the CBO.

Payroll Tax

Included is the $95 billion expiration of a 2 percentage point cut in the payroll tax. Other tax breaks also will end or shrink, including a credit for college tuition.

In all, if Congress does nothing, 82.9 percent of U.S. households would face tax increases averaging $3,701, according to the Tax Policy Center. More than 98 percent of households earning more than $50,000 a year would pay higher taxes.

Automatic spending cuts -- half affecting national defense programs -- are scheduled to begin in 2013. Those came from the 2011 agreement that included a debt-limit increase. The cuts were designed as a blunt instrument to force Congress to find other deficit-reduction proposals to offset them, and Congress hasn’t found anything yet.

Over 10 years, the cuts will reduce projected government spending by $1.2 trillion. CBO estimates that the short-term effect in fiscal year 2013 will be $65 billion.

Expanded unemployment benefits will end without congressional action, saving the government $26 billion. Also expiring is a provision that prevents steep cuts in Medicare reimbursements to doctors, reducing spending by $11 billion.

$18 Billion

Further, $18 billion in taxes from the 2010 health-care law are scheduled to take effect. These include a 2.3 percent excise tax on medical devices and new taxes on the wages and unearned income of the nation’s highest earners.

A “breakthrough moment of harmony” is hard to envision, said Earl Pomeroy, a former Democratic representative from North Dakota who is now a lobbyist at Alston & Bird LLP in Washington.

“The most likely outcome is that those things that are needed to tide us into the new year get done and the real battle’s engaged in 2013,” said Pomeroy, whose clients include Aetna Inc. (AET:US) and Vibra Healthcare LLC.

Beyond the fiscal changes already scheduled, at least two other significant issues may be on the congressional agenda after the election.

Debt Limit

Early in 2013, the U.S. will bump up against the $16.4 trillion debt limit. The exact date when a higher ceiling will be needed isn’t known yet, Treasury Secretary Timothy F. Geithner has said.

Congress also might face the expiration of spending authority for federal agencies. The fiscal year ends Sept. 30, and it’s possible that a pre-election extension would be temporary and require post-election action.

Getting from the end of the fiscal year through the presidential inauguration will be difficult because of the “piling up” of issues and the short time frame, said Senator Lamar Alexander, a Tennessee Republican who has been working with a group of Republicans and Democrats toward an agreement on the big-picture fiscal issues.

“If we do it right, we send a signal to the world that we’re capable of dealing with big issues, and that puts the United States in a very good position,” he said.

An agenda full of the fiscal issues that have divided Democrats and Republicans makes consensus difficult to reach. This Congress bickered to the brink over much less significant sums, including a payroll tax cut extension at the end of 2011 and start of 2012 and the airline ticket taxes in July and August of 2011.

‘Muddle Through’

“There’s a certain level of dysfunctionality right now,” said Representative Mike Thompson, a California Democrat and a member of the Ways and Means Committee. “Even if we muddle through, I don’t think that’s a good thing.”

The fate of the tax cuts -- which have been a partisan wedge issue since President George W. Bush pushed them through Congress in 2001 -- is the biggest political stumbling block.

“All we have to do is have the Republicans come say, we want to do our share with revenues,” Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters June 12, signaling a willingness to cut spending, too. “We’re not going to do it in leading with our chin, as we have in the past. And they never help us with revenues.”

Revenue Increases

Most Republicans don’t want to budge on taxes, though some are willing to consider revenue increases paired with spending cuts. They’ve made offers that included new revenue, though disagreements about the scope and details of the Republican proposals have prevented agreement.

“So our question is: What is enough?” Senator Jon Kyl of Arizona, the second-ranking Senate Republican, said June 5. “When you say put revenues on the table, we put revenues on the table before, to no effect.”

Even with the congressional dysfunction, investors still trust U.S. Treasury bonds as a safe haven. Yields on 10-year Treasury notes reached a record low of 1.44 percent on June 1.

Still, said Representative Devin Nunes, Congress is running out of time and has about a year to get the tax and entitlement systems in the right shape for the future.

“What governments won’t do,” said the California Republican, “the free market will do on its own.”

The U.S. should lead other countries in getting its fiscal affairs in order with a 10-year plan that will reduce the budget deficit, Representative Richard Gephardt, a former Democratic House leader, said on Bloomberg Television June 13.

‘Some Sacrifice’

“Everybody has to have some sacrifice on both ends,” said Gephardt, now a lobbyist whose clients include Google Inc. and General Electric Co. “You’re taking a little castor oil now for everybody so you can enjoy much better times down the road.”

Nussle, now president of Growth Energy, an ethanol lobbying group in Washington, said elections and market events are the only two outside pressures that could cause Congress to budge.

“Our founding fathers created this to try and be difficult,” he said. “They didn’t want one person or a small group to have the ability to do anything -- and they succeeded.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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